[Federal Register Volume 61, Number 132 (Tuesday, July 9, 1996)]
[Notices]
[Pages 36096-36097]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-17356]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37390; International Series Release No. 999; File No.
SR-ISCC-96-03]
Self-Regulatory Organizations; International Securities Clearing
Corporation; Notice of Filing of a Proposed Rule Change Relating to the
Clearing Fund Formula
July 1, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on May 16, 1996, the
International Securities Clearing Corporation (``ISCC'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change (File No. SR-ISCC-96-03) as described in Items I, II, and III
below, which items have been prepared primarily by ISCC. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Changes
ISCC is filing the proposed rule change to extend approval of its
clearing fund formula.\2\
---------------------------------------------------------------------------
\2\ The Commission temporarily approved two previous ISCC
proposed rule changes amending ISCC's clearing fund formula.
Securities Exchange Act Release No. 35970 (July 13, 1995), 60 FR
37698 [File No. SR-ISCC-95-03] (notice of filing and order granting
accelerated approval on a temporary basis of ISCC's clearing fund
formula) and Securities Exchange Act Release No. 34392 (July 15,
1994), 59 FR 37798 [File No. SR-ISCC-94-1] (order temporarily
approving on an accelerated basis ISCC's clearing fund formula).
---------------------------------------------------------------------------
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Changes
In its filing with the Commission, ISCC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. ISCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of such
statements.\3\
---------------------------------------------------------------------------
\3\ The Commission has modified these summaries.
---------------------------------------------------------------------------
[[Page 36097]]
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The purpose of the proposed rule is to extend approval of ISCC's
clearing fund formula.\4\ ISCC is obligated to the London Stock
Exchange (``LSE'') to pay for all securities delivered to ISCC through
the ISCC-LSE link. ISCC has no responsibility to complete open pending
trades (i.e., once a member fails, ISCC no longer accepts delivery of
securities for such member through the link). To adequately cover
ISCC's exposure, each member's clearing fund deposit requirement is
calculated and collected on a weekly basis. Each member is required to
deposit the greater of (a) the largest deposit requirement imposed over
the last 365 day period or (b) the deposit that would be required based
on the clearing fund calculation using trades due to settle over the
next week. Calculations are made each Tuesday, and members are required
to deposit additional clearing fund amounts within three days.\5\
---------------------------------------------------------------------------
\4\ In 1986, ISCC and the London Stock Exchange (``LSE'')
entered into a linkage agreement which allows ISCC to obtain
comparison and settlement services in the United Kingdom from the
LSE on behalf of ISCC members. At that time, the LSE settled trades
on a fornightly basis with all trades that occurred during a two
week period settling on the same day. On July 18, 1994, the LSE
moved to a ten day rolling settlement cycle with trades settling ten
days after trade date. On June 26, 1995, the LSE moved to a five day
rolling settlement period. In response to the change to a rolling
settlement cycle, ISCC adjusted its method of calculating its
clearing fund requirements.
\5\ For example, ISCC calculates a member's clearing fund
requirement on Tuesday, August 2, based on trades due to settle on
Tuesday, August 2, through Monday, August 8 (i.e., trades conducted
on Tuesday, July 26, through Monday, August 1). Because an ISCC
member has three business days after the calculation to make
additional deposits, under the five day rolling settlement cycle,
ISCC generally is calculating and collecting clearing fund
contributions based on trades which already have settled. Under the
prior ten day rolling settlement system, the clearing fund formula
was based on the actual largest daily obligation of a member during
the relevant time period, and the clearing fund deposit could be
calculated and collected prior to the settlement day.
---------------------------------------------------------------------------
ISCC's clearing fund formula is: (Gross Debit Value) x (Market Risk
Factor) + (Foreign Exchange Factor).\6\ The Gross Debit Value is a
member's largest single daily gross debit value based on debit values
for five consecutive business days including the day on which the
calculation is performed less 15% of the Institutional Net Settlement
(``INS'') receive value for that same day.\7\ The Market Risk Factor is
based on the largest calculated percentage change in the Financial
Times Index over a six day period over a minimum of 365 days.\8\ The
Market Risk Factor will continue to be set at 7%. The Foreign Exchange
Factor is based in part on the Estimated Foreign Exchange Volatility,
which is an amount that is equal to the largest one day percentage
change in the U.S. dollar/British pound foreign exchange rate over a
minimum of 365 days.\9\ The Estimated Foreign Exchange Volatility will
continue to be set at 4%.\10\ The Market Risk Factor and Foreign
Exchange Risk Factor for members on surveillance can be increased in
the discretion of ISCC by 3%, 5%, and 7% for members on Advisory, Class
A, and Class B surveillance, respectively.
---------------------------------------------------------------------------
\6\ Members will continue to be required to contribute a minimum
of $50,000 to the clearing fund.
\7\ Under the INS system, redeliveries of securities from ISCC
members to institutional participants can occur automatically
through the LSE. Therefore, ISCC generally is not required to pay
the LSE for these securities. The debits arising from these
redeliveries may be offset only partially because these securities
may be reclaimed (i.e., returned) by the receiver, and in such
circumstance, ISCC is liable to the LSE for the full value of the
reclamation.
\8\ ISCC bases its clearing fund calculations on the assumption
that it will take one day to sell all of a defaulting participant's
positions. Under a five day settlement period, this results in a six
day exposure for market risk with five days between trade date and
settlement date and one day between settlement date and close out of
positions. There also is a one day exposure for foreign exchange
risk because ISCC converts U.S. dollars to British pounds on the
settlement date and converts the proceeds from the sale of the
positions to U.S. dollars the following day.
\9\ The Foreign Exchange Factor is the product of the Gross
Debit Value and the Estimated Foreign Exchange Volatility less the
produce of the Gross Debit Value times the Market Risk Factor times
the Estimated Foreign Exchange Volatility.
\10\ During the period from 1989 to 1992, the maximum
fluctuation in the U.S. dollar-British pound exchange rate was
4.445%. ISCC will continue to review annually the foreign exchange
risk factor.
---------------------------------------------------------------------------
The proposed rule change will permit ISCC to safeguard securities
and funds in its custody or control and is therefore consistent with
Section 17A of the Act \11\ and the rules and regulations thereunder.
---------------------------------------------------------------------------
\11\ 15 U.S.C. Sec. 78q-1 (1988).
---------------------------------------------------------------------------
(B) Self-Regulatory Organization's Statement on Burden on Competition
ISCC does not believe that the proposed rule change will have an
impact on or impose a burden on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received from Members, Participants, or Others
ISCC will notify the Commission of any written comments received by
ISCC.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within thirty-five days of the date of publication of this notice
in the Federal Register or within such longer period (i) as the
Commission may designate up to ninety days of such date if it finds
such longer period to be appropriate and publishes its reasons for so
finding or (ii) as to which ISCC consents, the Commission will:
(a) by order approve such proposed rule change, or
(b) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. Sec. 552, will be available for inspection and copying in
the Commission's Public Reference Section, 450 Fifth Street, NW.,
Washington, DC 20549. Copies of such filing will also be available for
inspection and copying at the principal office of ISCC. All submissions
should refer to the file number (ISCC-96-03) and should be submitted
by: July 30, 1996.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\12\
---------------------------------------------------------------------------
\12\ 17 CFR 200.30-3(a)(12) (1995).
---------------------------------------------------------------------------
Jonathan G. Katz,
Secretary.
[FR Doc. 96-17356 Filed 7-8-96; 8:45 am]
BILLING CODE 8010-01-M
